Raise the Minimum Wage

April 17 (Bloomberg) -- Here’s an unhappy observation about
the minimum wage: Congress last increased the rate in stages in
2007, topping it out at $7.25 an hour in 2009, or $15,080 a
year.

That amount, when adjusted for inflation, is actually lower
than what a minimum-wage worker earned in 1968 and is too meager
to offer anyone the chance to climb out of poverty, let alone
afford basic goods and services.

About 10 states are now considering raising the rate, and
Senator Tom Harkin, an Iowa Democrat, is proposing to increase
the federal rate in three increments to $9.80 an hour in 2014.
Many of the initiatives under consideration would smartly tie
the minimum wage to the cost of living, meaning that those
workers’ wages would finally keep up with inflation.

The past recession was brutal on jobs, household wealth and
economic growth. But wages were hit hard, too. Real average
hourly earnings have fallen below the level of 2009. Although
wages often lag job growth after a recession, the pace of income
gains this time around is far slower than in previous
recoveries.

Low-Wage Bias

It’s also becoming clear that many Americans are being
forced to take lower-paying jobs and that a low-wage bias is
creeping into the economy, as Bloomberg economist Joseph
Brusuelas recently put it. In many cases, minimum-wage work is
all that’s available, which may explain why such workers are
older and better-educated than they were three decades ago. In
2010, nearly 44 percent of minimum-wage workers had either
attended or graduated from college, up from 25.2 percent in
1979, according to the Center for Economic and Policy Research,
a liberal think tank.

Raising the minimum wage won’t entirely solve the problem
of anemic incomes, but it would help. Economists have long found
that boosting the minimum wage can raise income levels for those
earning just above the minimum. Employers, seeking to protect
“wage ladders,” often bump up salaries for slightly higher-paid employees, too.

This is one of many reasons that critics, including
business groups like the U.S. Chamber of Commerce, the National
Restaurant Association and many Republicans, oppose minimum-wage
increases. The argument is that it will hurt the very people it
was meant to help by forcing employers to cut jobs, raise prices
or both. They point to studies that minimum-wage increases hurt
teenagers, because young workers typically get minimum-wage
jobs, which become scarce when employers are forced to raise
salaries.

But a wave of new economic research is disproving those
arguments about job losses and youth employment. Previous
studies tended not to control for regional economic trends that
were already affecting employment levels, such as a
manufacturing-dependent state that was shedding jobs. The new
research looks at micro-level employment patterns for a more
accurate employment picture.

The studies find minimum-wage increases even provide an
economic boost, albeit a small one, as strapped workers
immediately spend their raises. A 2011 paper by economists at
the Federal Reserve Bank of Chicago found that a $1 minimum-wage
increase lifts household income by about $250 and increases
spending by about $700 a quarter in the following year. The
spending increase is driven by a small number of households that
primarily buy vehicles.

No Employment Effects

A team of economists, led by Arindrajit Dube of the
University of Massachusetts-Amherst, compared employment levels
in contiguous areas with disparate minimum-wage levels over a
16-year period and concluded in a 2010 paper there are “strong
earnings effects and no employment effects of minimum wage
increases.”

The federal minimum wage was always meant to be a floor,
not a ceiling. Today, someone earning the minimum would have to
work 749 hours to afford one year of health insurance premiums
and 923 hours to afford a year’s tuition at a public four-year
college.

Although this math may not be persuasive in Washington, it
does seem to be influencing legislatures across the country. Let
us hope that states lead the way on the minimum wage, and that
they tie increases to the cost of living, making endless rounds
of legislation unnecessary. Then let us hope that fresh research
and improved lives built on hard work compel Congress to follow.

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